First Look

First Look summarizes new working papers, case studies, and publications produced by Harvard Business School faculty.
Readers receive early knowledge of cutting-edge ideas before they enter the mainstream of business practice.
For complete details on faculty research, see our Working Papers section.

May 22, 2007

When government bides its time before making a decision, the costs can be real. According to a new working paper available for download, while people wait for a policy to be resolved they are affected for the worse in terms of consumption, saving, and portfolio decisions. So explain HBS finance professor Luis Viceira and colleagues in "The Excess Burden of Government Indecision." "Whatever the political motives for waiting to decide, procrastination distorts economic decisions relative to what would arise with early policy resolution," they write.
This week sees 7 more working papers for download on business topics ranging from global currency hedging to organizational design; and field cases on leadership challenges as diverse as running the Federal Bureau of Investigation and personal-care products innovator Burt's Bees.

— Martha Lagace

Working Papers

Global Currency Hedging

Authors:

John Y. Campbell, Karine Serfaty-de Medeiros, and Luis M. Viceira

Abstract

This paper considers the risk management problem of an investor who holds a diversified portfolio of global equities or bonds and chooses long or short positions in currencies to manage the risk of the total portfolio. Over the period 1975-2005, we find that a risk-minimizing global equity investor should short the Australian dollar, Canadian dollar, Japanese yen, and British pound but should hold long positions in the US dollar, the euro, and the Swiss franc. The resulting currency position tends to rise in value when equity markets fall. This strategy works well for investment horizons of one month to one year. In the past 15 years the risk-minimizing demand for the dollar appears to have weakened slightly, while demands for the euro and Swiss franc have strengthened. These changes may reflect the growing role for the euro as a reserve currency in the international financial system. The risk-minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the US dollar. Risk-reducing currencies have had lower average returns during our sample period, but the difference in average returns is smaller than would be implied by the global CAPM given the historical equity premium.

The Excess Burden of Government Indecision

Authors:

Francisco J. Gomes, Laurence J. Kotlikoff, and Luis M. Viceira

Abstract

Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever the political motives for waiting to decide, procrastination distorts economic decisions relative to what would arise with early policy resolution. In so doing, they engender excess burden. This paper posits, calibrates, and simulates a life cycle model with earnings, lifespan, investment return, and future policy uncertainty. It then measures the excess burden from delayed resolution of policy uncertainty. The first uncertain policy we consider concerns the level of future Social Security benefits. Specifically, we examine how an agent would respond to learning in advance whether she will experience a major Social Security benefit cut starting at age 65. We show that having to wait to learn materially affects consumption, saving, and portfolio decisions. It also reduces welfare. Indeed, we show that the excess burden of government indecision can, in this instance, range as large as 0.6 percent of the agent's economic resources. This is a significant distortion in and of itself. It's also significant when compared to other distortions measured in the literature. The second uncertain policy we consider concerns marginal tax rates. We obtain similar results once we adjust for the impact of tax rates on income.

On The General Relativity of Fiscal Language

Authors:

Jerry Green and Laurence J. Kotlikoff

Abstract

A century ago, everyone thought time and distance were well-defined physical concepts. But neither proved absolute. Instead, measures/reports of time and distance were found to depend on one's reference point, specifically one's direction and speed of travel, making our apparent physical reality, in Einstein's words, "merely an illusion."

Like time and distance, standard fiscal measures, including deficits, taxes, and transfer payments, depend on one's reference point/reporting procedure/language/labels. As such, they too represent numbers in search of concepts that provide the illusion of meaning where none exists.

This paper, dedicated to our dear friend, David Bradford, provides a general proof that standard and routinely used fiscal measures, including the deficit, taxes, and transfer payments, are economically ill-defined. Instead, these measures reflect the arbitrary labeling of underlying fiscal conditions. Analyses based on these and derivative measures, such as disposable income, private assets, and personal saving, represent exercises in linguistics, not economics.

Self-Regulatory Institutions for Solving Environmental Problems: Perspectives and Contributions from the Management Literature

Authors:

Andrew King and Michael W. Toffel

Abstract

Scholars of management have long considered how institutions can help resolve market imperfections and thereby improve human welfare. Most previous research has emphasized the use of for-profit firms. Such institutions cannot effectively address many environmental problems, however, because environmental problems often transcend firm boundaries. As a result, management scholars have begun to explore the use of more distributed institutional forms. In this article, we review the emerging scholarship on the formation and function of self-regulatory institutions.

Abstract

Designers often seek modular architectures to better accommodate expected changes and to enable parallel development. However, we lack a formal theory and model of modularity and software evolution, which can be used for description, prediction, and prescription. According to Baldwin and Clark's theory, modular architectures add value to system designs by creating options to improve the system by substituting or experimenting on individual modules. In this paper, we evaluate their theory by looking at the design evolution of two software product platforms through the modeling lens of design structure matrices (DSMs) and design rule theory. Our analysis shows that DSM models and options theory can explain how real-world modularization activities in one case allowed for different rates of evolution in different software modules and in another case conferred distinct strategic advantages on a firm (by permitting substitution of an at-risk software module without substantial change to the rest of the system). The experiment supports our hypothesis that these formal models and theory can account for important aspects of software design evolution in large-scale systems.

From Outsourcing to Global Collaboration: New Ways to Build Competitiveness

Abstract

Many companies have successfully used outsourcing to lower costs. But, unless the company's efforts are unusually good, true competitive advantage is fleeting when competitors begin outsourcing and achieve similar results. To build sustainable competitive advantage, leading companies are now using an advanced form of outsourcing, called global collaboration, to drive new revenue, quicken time-to-market, and increase innovation. Global collaboration impacts their top as well as bottom lines. But effectively adopting this approach requires adjustments to traditional outsourcing strategy, organization and processes.

In a recent research project, we interviewed managers from 45 projects in over 20 firms to understand the practices that differentiated those firms that reported greater success with the use of collaboration. We found that the competencies required for achieving top-line growth through global partners are different than the competencies required to be successful in reducing costs via outsourcing. Yet, many companies continue to manage global collaboration projects in the same ways they managed cost-reduction projects and thus do not obtain the full value from these projects. Our work led us to propose several frameworks for how firms should think about their collaboration efforts (reported in a separate working paper) as well as to codify a set of organizational “best practices” that were common to companies who reported greater success in the use of collaboration (reported in this paper).

Ambidexterity as a Dynamic Capability: Resolving the Innovator's Dilemma

Authors:

Charles A. O'Reilly III and Michael L. Tushman

Abstract

How do organizations survive in the face of change? Underlying this question is a rich debate about whether organizations can adapt—and if so how. One perspective, organizational ecology, presents evidence suggesting that most organizations are largely inert and ultimately fail. A second perspective argues that some firms do learn and adapt to shifting environmental contexts. Recently, this latter view has coalesced around two themes. The first, based on research in strategy, suggests that dynamic capabilities, the ability of a firm to reconfigure assets and existing capabilities, explains long-term competitive advantage. The second, based on organizational design, argues that ambidexterity, the ability of a firm to simultaneously explore and exploit, enables a firm to adapt over time. In this paper we review and integrate these comparatively new research streams and identify a set of propositions that suggest how ambidexterity acts as a dynamic capability. We suggest that efficiency and innovation need not be strategic tradeoffs and highlight the substantive role of senior teams in building dynamic capabilities.

Organizational Designs and Innovation Streams

Abstract

This paper empirically explores the relations between alternative organizational designs and a firm's ability to explore as well as exploit. We operationalize exploitation and exploration in terms of innovation streams; incremental innovation in existing products as well as exploring into architectural and/or discontinuous innovation. Based on in-depth, longitudinal data on 13 business units and 22 innovations, we investigate the consequences of organization design choices on innovation outcomes as well as the ongoing performance of existing products. We find that ambidextrous organization designs are significantly more effective in executing innovation streams than functional, cross-functional, and spinout designs. Further, transitions to ambidextrous designs were associated with significantly increased innovation outcomes, while shifts away from ambidextrous designs were associated with decreases in innovation outcomes. We explore the nature of ambidextrous organizational designs – their characteristics, how they operate, and their boundary conditions. Given these results, we discuss the relations between streams of innovation, organizations' designs, and the nature of organizational adaptation.

Bond Risk, Bond Return Volatility, and the Term Structure of Interest Rates

Author:

Luis M. Viceira

Abstract

This paper explores time variation in bond risk, as measured by the covariation of bond returns with stock returns and with consumption growth, and in the volatility of bond returns. A robust stylized fact in empirical finance is that the spread between the yield on long-term bonds and short-term bonds forecasts positively future excess returns on bonds at varying horizons, and that the short-term nominal interest rate forecasts positively stock return volatility and exchange rate volatility. This paper presents evidence that movements in both the short-term nominal interest rate and the yield spread are positively related to changes in subsequent realized bond risk and bond return volatility. The yield spread appears to proxy for business conditions, while the short rate appears to proxy for inflation and economic uncertainty. A decomposition of bond betas into a real cash flow risk component, and a discount rate risk component shows that yield spreads have offsetting effects in each component. A widening yield spread is correlated with reduced cash-flow (or inflationary) risk for bonds, but it is also correlated with larger discount rate risk for bonds. The short rate forecasts only the discount rate component of bond beta.

Cases & Course Materials

Alan Kendricks at Cardiology Associates

Harvard Business School Case 407-067

Alan Kendricks struggles to address many challenges facing him as a recently promoted medical director for Cardiology Associates at Southeastern Pennsylvania University Hospital. He must balance his time taking care of patients, running a practice, managing up, down, and laterally, managing stars with little formal authority, allocating resources fairly, developing his people, providing strategy and direction, building an organization, and spending time with his family. Offers insights into the dilemmas of a "producing manager," a person who is simultaneously responsible for producing and managing.

Bert Twaalfhoven: The Successes and Failures of a Global Entrepreneur

Harvard Business School Case 807-045

Bert Twaalfhoven (70; HBS '54) is faced with two offers to acquire the manufacturing holding company he had built up over 40 years. Despite the attractive price which would net Twaalfhoven and his family $70 million, he is reluctant to sell the company because his original vision was to create a family-owned conglomerate that would last for generations. Of his eight children, two are appropriate successors, but neither shows much interest in following in their father's footsteps. The case chronicles the dozens of successes and failures of this serial global entrepreneur.

Burt's Bees: Leaving the Hive

Harvard Business School Case 507-017

Rapid growth is pushing Burt's Bees' natural personal care products into mass distribution channels, with products and brand elements that are less quirky, more commercial than they used to be. Indeed, CEO John Replogle believes that by focusing on efficacious, natural, and unique ingredients, and also by promoting earth-friendly production processes, Burt's Bees will impose superior product expectations and win over the mainstream personal care category. Can Burt's Bees become the "Starbucks of personal care" without distancing itself too much from the people, values, and narratives that have made the brand successful thus far?

ConAgra Foods: The Next Chapter

Harvard Business School Case 906-409

In 2005, CEO Bruce Rohde has almost completed the integration of ConAgra Foods' collection of 90 independent operating companies into a focused, value-added firm and was beginning to think about his successor. ConAgra had become the second-largest food company and No. 1 food service supplier in the United States. Rohde believed that the company, with its solid portfolio of brands and history of leadership in important trends such as healthy foods, was ready to begin its next chapter as one of the great marketing companies, in league with Kraft Food or Coca-Cola. The job of the next CEO would be to unlock the enterprise value of the company in the face of continuing customer consolidation and increasingly diverse consumer requirements.

Federal Bureau of Investigation (A)

Harvard Business School Case 707-500

In the wake of the 9/11 terrorist attacks, Robert Mueller, Director of the FBI, faces the challenge of remaking the storied Bureau. Skeptics question his ability to build an organization that can solve crimes after they occur *and* prevent terrorist attacks before they occur. The case discussion emphasizes that the scope of an organization is limited in part by the need to have compatible structures, systems, processes, and cultures within it.

Federal Bureau of Investigation (B)

Fritidsresor Under Pressure (A): The First 10 Hours

Harvard Business School Case 407-007

When a tsunami hit Southeast Asia on December 26, 2004, the leadership team at a Swedish tour company must manage a devastating crisis affecting thousands of its customers and employees in Thailand. Documents the challenges the company faced in the first ten hours of the crisis. Amid the uncertainty of those first hours, the leadership team must make a range of decisions to orchestrate the company's response and manage the rest of its business. Describes the chaotic environment of a crisis, especially when the normal course of business is interrupted, and puts students in the shoes of a range of managers, each having to make decisions on his/her own, while coordinating with one another to enable the company to respond effectively.

Fritidsresor Under Pressure (C): After the Tsunami

M-TRONICS (A)

Harvard Business School Case 807-156

The new CEO of a small manufacturing firm pursues growth through the launch of Entrepreneurial Subsidiaries. While the firm grows revenues from $600 million to over $2 billion in 10 years, problems surface as the subsidiaries are integrated into the established business.

M-TRONICS (B)

PSI: Social Marketing Clean Water

Harvard Business School Case 507-052

Senior management at PSI, arguably the world's largest and most successful social marketer with impressive achievements in the field of family planning, HIV/AIDS, and malaria prevention must determine what to do about their slow-to-take-off clean water initiative. PSI's point-of-use products offered effective protection against water-borne diseases, especially diarrhea, yet the organization found it hard to attract donor funds to sustain the initiative. Its managers must determine how to alter their strategy going forward.

Ponsse: From Finland to Global

Harvard Business School Case 507-002

Finland-based Ponsse Oyj, with 2005 turnover of $250 million, is the only dedicated forest equipment company of size that remained in a consolidating industry. Competitors included global giants such as John Deere and Komatsu. Since his arrival at Ponsse in 2004, CEO Arto Tiitinen had focused the firm on delivering superior product quality and exceptional customer service. In 2006, the firm was limited by manufacturing capacity, but this constraint would be lifted when a new plant expansion came on-line in early 2007. Tiitinen was positioning the firm to increase sales in countries such as Russia, Brazil, and the United States. How could the CEO make sure that Ponsse maintained its important characteristics as it expanded its global sales and service network? Information on the global forest industry is included.

Publications

Fast-Track Profit Models: Creating the New Due-Diligence Process for Mergers and Acquisitions

Authors:

Steven R. Anderson, Kevin J. Prokop, and Robert S. Kaplan

Periodical:

Journal of Private Equity (in press)

Abstract

A fast-track profit model, exploiting the simplicity and power of time-driven activity-based costing, provides acquirers with a powerful new tool during the due-diligence process. By using existing industry templates, potential acquirers with access to the target's general ledger, and order, product and customer files, can quickly build an approximate model of the target's product and customer profitability. Knowing where and how much the target is currently losing with unprofitable products and customers, the acquirer can develop a profit plan based on transforming unprofitable relationships into profitable ones. The increased cash flow forecasted from the rapid profit turnaround allows the acquirer to offer a higher price without raising its multiple. If the private equity firm wins the bidding contest, the profit model subsequently becomes a blueprint for managing the turnaround company and aligning company management to the required actions.

Trading Restrictions and Stock Prices

Author:

Robin Greenwood

Publication:

Review of Financial Studies (forthcoming)

Abstract

Firms can manipulate their stock price by limiting the ability of their investors to sell. I examine a series of corporate events in Japan in which firms actively reduced their float--the fraction of shares available to trade--for periods of one to three months, locking investors into their long positions. Theory predicts that the greater the restrictions, the greater the impact of trading on price. Particularly severe restrictions are associated with returns of over 30 percent, most of which are reversed when the restrictions are removed. Firms are more likely to issue equity or redeem convertible debt during the restricted period, suggesting strong incentives for manipulation.

Revisiting the Strategy, Structure, and Performance Paradigm: The Case of Venture Capital

Author:

Noam Wasserman

Periodical:

Organization Science (forthcoming)

Abstract

The strategy-structure-performance paradigm has developed a central role within strategy research. However, recent critiques of the paradigm have called for research that uses more appropriate measures of strategy and structure, inductive methods that enable richer exploration of the paradigm, and extension of the paradigm to the expert-focused organizations that have grown in importance since the paradigm was first developed. This paper answers this call by integrating inductive methods with quantitative analysis of a unique panel dataset of 317 professional-services firms in order to find new measures of strategy and to understand their linkages to organizational structure within such firms. It shows how the core knowledge required for decision making and the coordination challenges in these firms drive their internal structures, and that the degree of strategy-structure fit has important performance implications for those firms.